We have shown throughout this briefing series how performance arises from the complementary development of resources, leading to outcomes that reflect the power of the entire system, rather than the sum of individual elements (first outlined in Briefings 16-22). Adding capabilities to this understanding offers a still more powerful structure.

Any organization will possess capabilities linked to each of its main resources. It is therefore to be expected that learning on several of these would add still further to performance. Figure 1 shows the impact for the retailer discussed in recent briefings if it adds to its site-finding capability a capability for what is known as “merchandizing” — the ability to identify the best product range to attract consumers and display them in the most appealing manner. At first this capability is modest, at 0.5, implying that the business is winning potential consumers at only half the rate it could if it were totally capable. Its experience with new stores allows its merchandizing team to improve their capability until, by year five, the capability is near total. The consequences of this are that whenever a new store is opened, virtually all potential consumers are captured immediately. (This is in fact what leading retailers expect to accomplish, with newly opened stores moving straight to high levels of penetration in their local market.)

Figure 1: Adding further to the retailer’s performance with increasing merchandizing capability. (Click image to view larger)

The further improvement in performance is considerable, but entirely realistic. Although customer numbers and sales only grow to some 30% more than when relying on low levels of merchandizing capability, the resulting increase in gross profit is added to the stores’ largely fixed cost base, so operating profits rise sharply. This further justifies the suggestion that small differences in capabilities and learning can explain exceedingly wide differences in performance of rival firms, with no need to hypothesize the existence of complex or abstract capabilities.

Organizational learning has attracted considerable attention, both in the academic and managerial journals, and has led to many companies making efforts to ensure that learning is encouraged and enabled. Figure 1 offers the basis for constructing a model for this often abstract idea – just add to it the processes for making tacit knowledge explicit from Briefing 85 and make sure there is the small amount of slack in the organization to allow people the space to make it happen.

Until next time…

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Learning from games

Some management problems have analytical solutions, such as the impact on unit cost of raising production rates, or the net present value of an investment with known future cash flows. Most strategy challenges, and many functional, operational problems, on the other hand, feature a combination of accumulation and feedback mechanisms for which no analytical solution exists. Executives develop an intuitive grasp for such challenges simply by long experience. Whilst this may eventually work, it takes many years and is not entirely reliable, allowing poor strategy and policy to arise too often. A powerful alternative is to learn from games – models of reality. Most of the mechanisms described in this series of briefings can be explored with just such games – see strategydynamics.com/microworlds.

This briefing summarises material from chapter 10 of Strategic Management Dynamics, pages 662-666.

Read more about the book on our website